Exposing the Hocus Pocus of Trusts

Kent D. Schenkel

New England Law - Boston

A trust beneficiary may receive substantial benefits to property, and perhaps even virtual control over that property, yet the trust shields that property from costs associated with beneficiary’s commission of a tort, or a default on unsecured debt obligations, or the failure to provide for the surviving spouse at death, to give a few examples. While the outright owner of property must hold that property subject to the valid claims of these other parties, no participant in the trust arrangement undertakes these burdens. Instead, in an act of hocus pocus, they seem to simply vanish.

Unfortunately, the magic of trusts turns out to be a chimera, as the costs do not really disappear; they merely resurface elsewhere, falling on those outside the trust relationship. For example, burdens placed on outsiders as a result of property held in trust lead to litigation over rights of tort creditors as against trust beneficiaries and increase the cost of insurance and credit. This article serves as a call for recognition of what it terms these “elective externalities,” as well as a search for a practical approach to reducing them.

Schenkel, Kent D., Exposing the Hocus Pocus of Trusts (February 27, 2011). Available at SSRN: http://ssrn.com/abstract=1771642